The Global Alcohol Industry

Daniel O'Leary - 1469525

This reflective journal will explore the international environment of the Alcohol industry. The

trade of this product is global but local differences are important. We will look at the market

structure and the emerging strategies of the major companies. Last we will look at the

different marketing approaches and the future of the industry.

MBA 780 CE – Prof. P. Arce

Table of Contents

1) International Environment............................................................................................. 3

2) International Trade........................................................................................................... 4

3) International Finance....................................................................................................... 5

4) International Strategy...................................................................................................... 7

5) International Marketing................................................................................................... 9

6) Final Words....................................................................................................................... 11

Appendix................................................................................................................................. 12

Sources..................................................................................................................................... 15

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1) International Environment

Alcohol is made throughout the world. It can come from a variety of agricultural

products. It is produced formally by giant corporations such as Diageo and

informally by local farmers that distill their own plant mixes. This means that there

is an incredible diversity in this product and many subcategories exist. In this

journal I will consider the alcohol industry is made of three categories: wine, beer

and liquor.

Looking at the world alcohol consumption map (appendix) we can see that the

countries that are the biggest consumers are European, North American and

Australian. These areas also represent location of the most formal markets for

the alcohol beverage industry. Almost every country has a market for alcohol

beverages and there are an estimated 2 billion people who drink alcohol

worldwide. Not all national consumption is reflected in the official surveys. This is

because of the informal sector can account for a large portion of the

consumption. African countries are a good example of markets where the

consumption of local production is very important as the beverages made are

cheaper than factory made beverages.

The type of alcohol primarily consumed varies greatly depending on countries.

Wine producing countries such as France drink more wine. North American,

European and African countries are typically big beer consumers whereas Asian

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and Eastern European countries drink more spirits. These specific trends are

diminishing as in the past few years as consumers are opening up to beverages

not traditionally produced in their country.

Alcohol consumption is treated differently in every nation. Laws reflect the

national tendencies. These can range from outright prohibition as in 7 nations to

state-run monopolies on alcohol sales in 19 nations. More common methods

include minimum drinking ages (67 nations) and licensing of sales

establishments (50 nations). But there can also exist restrictions on advertising

(37 nations) and restrictions on driving (65 nations). The distribution system for

products can also be country specific, in the United States the three-tier system

is in place that prevents producers from directly selling to consumers.

2) International Trade

As I said previously the informal production, trade and sale of alcohol is

significant. Depending on the market it can account for up to more than half or

half the consumption (Indian subcontinent, Africa), and a third of consumption in

major markets such as Eastern Europe and Latin America. According to the

alcohol industry-funded International Center on Alcohol Policies (ICAP), branded

alcoholic beverages account for 38% of recorded alcohol consumption

worldwide.

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A handful of large companies dominate the market. In 2005 the 26 largest

companies totals over $150 billion in net revenue and $26 billion in profits.

Consolidation in this market has become key and the top 10 companies

accounted for 48% of sales by volume.

The break down for the three categories is different. The dominance is even

more pronounced in the beer sector where the same top 10 companies produced

66% of the beer in the world (Table 1). In some cases an individual company can

have up to 99% of a national market, an example is Peru (Table 4). The spirits

market is slightly more diluted with the top 10 companies representing 59% of

world production by volume. The three giants in this sector (Diageo - U.K, Pernod

Ricard – France, United Spirits – India) account for over 35% of the production

worldwide. The wine market is the most scattered as the top 10 companies only

represent 16% of the production. The vast majority of wine makers are still

associated in relatively small companies and only few global players have

emerged, most of them American or French.

3) International Finance

The global financial crisis has affected the alcohol industry as well. Overall the

crisis has not resulted in a contraction in volume but a decrease in growth. The

more mature markets such as the U.S were more affected than the younger ones

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like South America. China and India will continue to grow at a strong level. There

have been impacts on the type of brands consumed as well.

The consumers are shying away from premium brands and turning towards the

lower priced ones. This marks a point in the “premiumization” the industry has

seen in the past years. The crisis has also affected the location of consumption

trends, which in turn has had an impact on the types of alcohol consumed.

Consumers have turned to consuming beverages at home rather than at

establishments. Festive drinks such as Champagne have seen a decrease in

consumption. Although the general trend had been for consumers to switch over

to wine the exports of wine in France for 2009 were down 30%. In this economy

the clear winner in these troubled times is economy lager.

It is clear that with companies such as Diageo that operate in 180 countries,

hedging against currency risks is a major concern of international finance. The

little research I have done on the topic shows that the international companies

are well aware of these risks and their structure with subsidiaries aims to protect

them from major losses linked to international financial instability. Furthermore,

production operations tend to be done in countries with stable macro-economic

conditions.

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4) International Strategy

Globalization in the alcoholic beverage industry has led to a greater

concentration of brands. Acquisitions and portfolio banding were frequent in the

mid 2000s. The emerging companies have developed a portfolio to match their

goals. Constellation Brands for example has specialized in wine, Brown Foreman

has specialized in premium liquors. This has led to both companies having a

different target audience and allowed them to compete with other giants. Their

approach has changed from being geographical where one company would try

and dominate a market to being product driven where all markets are shared but

each product is pushed.

The international expansion has also led to a greater dependence on marketing.

A study of multinational survival in the global alcohol industry concluded, ‘... in

non-science-based industries such as alcoholic beverages, . . . brands and

marketing knowledge rather than technological innovation are central in

explaining the growth and survival of multinational firms’. This is partly why

acquiring brands has become the trend.

These two aspects lead me to think that the industry can be defined as having a

Transnational Strategy. Indeed the pressure of cost reduction is high. The

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competition in this environment is constant and the consumer trends indicate that

people are turning towards cheaper products. The pressure of local

responsiveness is high. Cultural differences mean people expect different

products. Local brands can capture a big portion of the market.

For international expansion companies have resorted to Foreign Direct

Investment, partnerships and acquisitions.

In the companies that have gone the FDI route some built factories to produce

their products in foreign countries. This diminishes the transporting costs and

allows to produce a more customized product. Guinness has built its biggest

factory in Lagos, Nigeria. After discovering that their biggest market was an

African country the company decided to produce directly there.

Partnerships have also become a trend in markets that are otherwise hard to

access. In 2009 Diageo partnered with Chinese white spirit producer Shui Jing

Fang to produce a premium vodka in China. This took place after Diageo said in

September it saw China as “the most resilient market in Asia despite turmoil on

financial markets and would look to expand in the mainland”. Partnerships offer

the security of local knowledge, this is especially important in markets that have

deeply rooted cultures and are hard to approach with foreign products.

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Acquisitions have been the favorite way of multinational alcohol companies to

expand. Diageo has acquired 40 companies in the last three decades. Brands

are incredibly valuable and often buying a brand is the best way to enter the

market. The consumers are already aware of the brand, it has loyal consumers

and the distribution system is in place. Marketing and rebranding can help the

transition and increase market share. A successful example is Chambord liquors

acquired by Brown Forman in 2006. The company then went on to change the

look of the bottle and develop a marketing campaign for the new bottle. Sales

jumped up 4% following this campaign.

5) International Marketing

Among the top 100 advertisers in 2010 according by Advertising Age five were

from the alcohol industry, those were Anheuser Busch (40 th, $850 million), SAB

Miller (57th with $638 million), LVMH (60 th with $560 million) Heineken (86 th with

$353 million), Diageo (93 rd, $304 million). Marketing as I said previously is hugely

important in the industry. The difference between competing products is very

limited and consumers can switch very easily. Brand loyalty is sought after and

gaining new consumers is essential to a brands survival. Companies target

different segments, they know that if they manage to acquire a drinker when he is

young then he will make repeat purchases throughout his lifetime.

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A problem companies have had to face in mature markets is the aging of their

average consumers. Indeed for some products, the main consumers have aged

and the brands have not been able to attract younger consumers. This has led to

many campaigns that try and attract new customers with innovative

presentations of their product. In the nineties for example many Cognac

companies advertised Cognac and Tonic as the new trendy drink. The population

of Cognac drinkers was aging and no young people were not drinking the liquor,

this campaign was successful in France were the average age of the consumer

was lowered.

The companies invest in marketing across all markets, indeed over 20% of SAB

Millers advertising budget went to Spanish-language advertising. Different

products are pushed in different markets and emerging trends show that the

younger markets accept new products better. An example is the new alco-pop

industry (with drinks such as Smirnoff-Ice and Jack and Coke) that has had a

hard time to gain significant market share in the United States, is thriving in

Mexico.

Corporate social responsibility has been present in the alcohol industry for the

past decade and for some companies even more. All of the major companies

have a portion of their marketing budget set aside for public safety campaign and

many have foundations dedicated to social causes. Diageo created the charity

Tomorrow’s People in 1981 in order to assist community projects and help

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unemployed people. It has been essential for companies to be seen as

responsible entities as the products they sell are controversial and subject to

government regulations. . The companies have tried to delay the implementation

of such regulations as much as possible by anticipating new standards,

especially in marketing their products.

6) Final Words

The global alcohol industry has experienced major growth in the recent decades.

Although this growth has slowed down since the financial crisis young emerging

markets will continue to provide new potential consumers. The international

companies have adapted their strategies to fit a transnational strategy and adapt

to their consumers worldwide.

The sector has seen a lot of consolidation with mergers and acquisitions in the

last two decades. Now the biggest players have positioned themselves in the

global market and battle each other for increased shares of new markets and

keep their present share in mature markets.

The future decade will see stabilization in the industry worldwide as the main

deals have been done and the players are established. The exception to this is

the wine sector that has yet to have had a super-player. China and India are the

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two markets that companies should focus on in terms of marketing. Getting a big

market share early will yield faithful consumers for the years to come.

Appendix

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